Sustainable Finance and Value Creation
Lecture Notes
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,Part 1: Corporate Purpose, CSR, Shareholder vs Stakeholder Value, and
the B-Corporation
ENHANCED SHAREHOLDER VALUE CREATION
From SVM to ESVM?
• Shareholder value maximization
• The traditional view = creating value for shareholders (residual claimants) and corporate
governance should prevent executives to pursue own interest
The Free Cash Flow (FCF) Approach
FCF = (1 - t) x EBIT + depreciation - CAPX - change NWC
• Expected after tax cash ows of an all equity rm
• These cash ows ignore tax savings the rm gets from debt nancing (the deductibility of
interest expense)
• Plan of attack:
1. Estimating the free cash ows
2. Account for the e ect of nancing on value
• Preview: Two ways to account for tax shield
• WACC method: Adjust the discount rate
• APV method: Adjust the cash ow estimate
Weighted Average Cost of Capital (WACC)
1. Generate the free cash ows (FCFs)
2. Discount the FCFs using the WACC
From SVM to ESVM?
• Enhanced shareholder value maximization
• Pluralistic approach?
• To weigh and balance a plurality of independent constituencies (stakeholders)
• Legal context
• Central Europe: civil law —> stakeholder is embedded in law
• US: common law with shareholder primacy
But in most states, constituency status are adopted: rms can consider the interest of
shareholders without violating shareholder primacy
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, • UK: since 2006 —> stakeholders are mentioned in UK Co Act
“To enhance shareholder value, including “the interest of the company’s employees”, “the
need to foster te company’s business relationships with suppliers, customers and others” and
“the impact of the company’s operations on the community and environment”
But: directors should consider such factors in order to promote the success of the company
for the bene t of its shareholders
• Consider interest of stakeholder —> this will serve long term SVM
• Long term value depends on stakeholders
• Employees: human capital
• Community of tax payers: (institutional) infrastructure
• Local community: tolerance for externalities
• Customers: revenues
• Firms: supply chain
Support for ESVM?
a. Corporate leadership
• US Business Roundtable: Whereas almost none of signatories explicitly express willingness to
trade-o shareholder value and stakeholder bene ts, many embrace an ESVM approach
• Corporate purpose statements: General Motors’ guidelines: shareholders’ long term interests
will be advanced by responsibility addressing the concerns of other stakeholders essential to
the company’s success, including customers, employees, dealers, suppliers, government
o cials and the public at large
• Davos Manifesto (World economic forum): stakeholder capitalism as form of capitalism in
which corporations seek long term value creation by taking into account the needs of all their
stakeholders, and society at large
b. Institutional investors
• Big3 urged CEOs to serve their full set of stakeholders, to manage systematic risks and
promote racial, ethnic, and gender diversity, and to tackle climate change
Big3 + many other large institutional investors: avoid endorsement of a pluralistic conception
of stakeholder capitalism, and explicitly stress stakeholder concerns to the extent that these
concerns matter for shareholder value
• BlackRock CEO Larry Fink: A company must create value for and be valued by its full range of
stakeholders in order to deliver long term value for its shareholders and stakeholder capitalism
is all about delivering long term, durable returns for shareholders
• State Street CEO Taraporevala: Addressing material ESG issues is good business practice and
essential to a company’s long term performance - a matter of value, not values
• Vanguard: Approaches ESG issues from a duciary perspective = e ect on nancial returns for
clients. Climate change represents a profound material, and fundamental risk to companies
and their shareholders long term success, ESG issues at the forefront in order to deliver value
to Vanguard investors
—> doing well by doing good
• Public pension funds = traditional activists + also activists on CSR issues: views climate
change, and associated risk and opportunities, as an investment issue, and by advocating for
climate risk reporting, can better protect our investments that help pay the pensions promised
to our members
—> endorse ESVM version of stakeholder capitalism
• Shareholder proposals on ESG by institutional investors: Proposals on climate change —>
stress “regulatory risk of upcoming environmental restrictions that dramatically change value
of corporations assets —> recommend that corporation pivot to greener projects to protect
shareholder value against such a risk
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, Is ESVM a Win-Win?
• Win-win = business choices —> bene t both shareholders and stakeholders.
• But executives face trade-o s between shareholder and stakeholder interests
• Even if company takes all available opportunities to improve shareholder value by improving
stakeholder welfare —> many more opportunities to improve stakeholder welfare at expense of
shareholders
• So, how far do you go?
Examples substantial trade-o s between shareholders and stakeholders
• Climate change: Oil and gas corporations invest more in oil wells involves trade-o between
shareholder interests and society’s interest in reducing climate risks
• O shoring: Company generates more pro t by moving manufacturing abroad to country with
substantially lower labor costs: extra long term pro ts —> reputational and moral costs to long-
term pro ts that result from move. Choice is trade-o between interests of shareholders and of
current employees and local communities
• Labor share: How to allocate FCFs between dividends to shareholders and extra compensation
to employees (beyond what is needed to retain them) —> tradeo between interests of
shareholders and employees
• Tax avoidance: Adopt structures to reduce tax liabilities, in compliance with law —> trade-o
between interests of shareholders and of tax payers and society
“Old” SVM: Executives should consider all that a ects long term shareholder value, including any
relevant stakeholder issues
• In practice, is ESVM = SVM?
• ESVM < > SVM if ESVM leads to fuller consideration of stakeholder e ects
ESVM = SVM
Conditions for equivalence of ESVM and SVM
1. Corporate leaders are not myopic and consider long term consequences of their choices on
long term shareholder value
2. Corporate leaders are well informed about consequences of the choices
3. Courts avoid micromanagement of corporate decisions and defer to the discretion of
corporate leaders under the business judgement rule
4. Only changes in actual treatment of stakeholders, and not merely linguistic changes in
formulation of decisions are taken to be actual changes (= no greenwashing!)
ESVM < > SVM
1. Focus on the long term
But is the long term always better?
• E.g. relocate plants o shore —> good for long term value, but what about 000s of local
stakeholders (employees, local supply chain, …)?
• E.g. relocate polluting plants o shore —> good for long term value, good for local environment
(stakeholder = community), what about 000s of local stakeholders, what about local
communities abroad?
• E.g. bonuses to employees to reach short term strategies —> good for employees, at detriment
of long term shareholder value?
—> Many con ict short term and long term criterion is not clear
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